Mark Lister, 16 June 2020

Global equity markets fell last week, giving back some of the recent gains as sentiment turned more cautious. The S&P 500 in the US finished the week 4.8% lower, the worst weekly performance since March. The top performing US sectors last week were technology (-2.0%), communication services (-2.8%) and consumer discretionary (-3.2%), while the worst were energy (-11.1%), financials (-9.3%) and industrials (-8.0%). UK shares were down 5.8% for the week, while Europe was 5.7% lower. The ASX 200 in Australia and our own NZX 50 held up better, falling just 2.5% and 2.4% respectively. The top NZX 50 movers were Metlifecare (+8.3%), Arvida (+6.6%) and Investore Property (+4.1%). The laggards were Vista Group (-10.3%), Kiwi Property Group (-9.3%) and Gentrack (-9.1%).

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There were no specific catalysts for the sell-off last week. Although, a sombre economic outlook from the Federal Reserve and increasing nervousness about a potential second wave of the virus amidst economies reopening and mass protests were contributing factors. China reported 57 new cases of COVID-19 on Saturday, the highest since mid-April. A major food market in Beijing and nearby housing districts were shut down amid fears of a resurgence in the virus. Many would argue that markets were due for a reversal of some magnitude, with US shares having rebounded 45% since the March lows.

The NZ dollar was quite resilient despite the pessimistic mood, possibly buoyed by the early move to level one which has fuelled speculation of a faster than expected domestic recovery. The currency fell 0.9% against the US dollar but never went far below US$0.64 at any point during the week. It fell 0.6% against the euro but gained against the Australian dollar and British pound. Interest rates declined, with the yield on a 10-year US Treasury bond falling from 0.90% to 0.70%, and the domestic five-year swap rate slipping four basis points to 0.38%.

Turning to the week ahead, investors will focus on Fed Chair Jerome Powell’s testimony to Congress. US retail sales for May should reflect a strong rebound from weak April levels. Central bank meetings will take place in Japan and the UK, while China releases monthly activity indicators early in the week.

It’s a busy few days on the local front too, with the latest global dairy trade (GDT) auction results set to be released early on Wednesday morning. Prices were flat at the last auction, with the headline GDT index rising a marginal 0.1%. Prices are 10.7% below where they began the year and are 12.9% down from a year ago. More encouragingly, whole milk powder (a key product for domestic dairy exporters) prices were up 2.1%. A rising currency is likely becoming a little problematic for the sector, with the NZ dollar having rallied more than 8.0% against the US dollar since the end of March.

The March quarter GDP report coming later in the week will also be a local highlight. The report is due on Thursday morning, and it is very difficult to ascertain just how it might look. It will certainly be affected by the lockdown which took place late in the quarter, although the degree of the impact is unknown. Things were going well for New Zealand through most of the March quarter, although the outbreak of the virus in China during January and February likely had a minor impact on the agricultural sector, as will have drought conditions in some parts of the country. In its last monetary policy statement, the RBNZ forecast a quarterly decline in GDP of 2.4% during the March quarter, which pales in comparison to the 21.8% decline that is forecast for the June quarter, when the worst of the lockdown will have been felt. Market forecasts are for a more modest decline of 1.0% in the March quarter. Across the Tasman, monthly labour force figures and the latest retail sales report will be of interest.